Industry Metrics for Outsourcing and Vendor Management

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1 Industry Metrics for Outsourcing and Vendor Management Scott Goldfarb Q/P Management Group, 10 Bow Street Stoneham, Massachusetts Tel: (781) FAX (781)

2 Agenda Overview Metrics Classification and Definition Establishing and Measuring Improvements Summary 2 2

3 Metrics Need to be Aligned with Outsourcing Goals Cost Reduction Improve Productivity Reduce Time to Market Improve Quality Improve Software Engineering Processes Improve Internal Expertise Offshore Development Reduce Frustration 3 3

4 Metrics Should be Established for Each Outsourcing Opportunity Classifying Outsourcing Options Core Functions Support Functions Mainframe Web Client Server New Development Enhancement Maintenance Help Desk Training Accounting Administration Technical Support Technologies PC Mid-Range Projects Projects Applications Help Desk Training Accounting Administration Technical Support Opportunities range from single projects to to complete organizations 4 4

5 Best Practice is to Establish a Baseline to Determine Opportunities and Negotiate the Deal Making the Decision Establish the Baseline Measure, Audit and Report Results Assess Goals and Alternatives Negotiate Performance Levels Determine Contract Scope and Terms 5 Identify Measures to Support Terms 5

6 Use of Metrics in Outsourcing Metrics and and payment options are are numerous depending on on the the goals and and contract terms Pay by the Metric Payment is based on Function Points delivered $700/ Function Point for example Casual Management Interest Identify performance productivity improvement Does not impact regular payments Tool to Manage Performance and Terms Provide incentives for achieving goals Assessing penalties for poor performance Benchmarking built into the agreement 6 6

7 Industry Standard Metrics for Outsourcing An Industry Standard for Outsourcing Metrics established by a standards organization (such as ISO, IEEE and IFPUG) does not exist Common Industry Practices have been developed based on the work and experience of Sourcing Deal Makers, Measurement Consultants and Outsourcers The following Metrics are observed to be frequently used in outsourcing agreements, are reasonably well defined and can be compared to industry benchmarks 7 7

8 Agenda Overview Metrics Classification and Definition Establishing and Measuring Improvements Summary 8 8

9 Application Development and Maintenance (AD&M) Activities AD&M activities are are typically organized into three categories: New Development Work activities that deliver brand new software applications Enhancement Work activities that modify existing software applications based on user requirements. This may include adding new functionality, changing existing functionality, or deleting existing functionality Maintenance Work activities required to maintain the system through repair of errors, optimization, software upgrades and preventative activities 9 9

10 Other AD&M Activities Activities that are are often included in in outsourcing deals but are are more difficult to to measure and are are often pay as as you go: Infrastructure Projects Help Desk Operations Production Support SME Support 10 10

11 Application Development and Maintenance AD&M Projects New Development Enhancements Development Type Platform Size Category Portfolio Type Business Domain Application Maintenance and Support Platform Age Portfolio Type Business Domain 11 11

12 Measuring Portfolios and Business Domains Business Domains are occasionally accounted for independently for service and billing purposes Portfolios represent major categories of different software types that need to be measured independently Business software (in-house) COTS (installations) Middleware Reusable components 12 Different portfolios and business domains may have different: Productivity rates Benchmark comparisons Metrics 12

13 Productivity and Cost (Based on Productivity) is the Most Critical Outsourcing Measure Productivity is is defined as as the the ratio of of the the volume of of output delivered to to the theresources consumed by by the the process. This ratio is is often referred to to as as a productivity rate or or efficiency rate. A process is considered to have improved its productivity if it: Delivers more output without increasing the level of one or more categories of resources; or Delivers the same volume of output using a lower level of one or more categories of resources; or Both delivers more output, and consumes a lower level of one or more categories of resources 13 13

14 Productivity Metrics New Development and Enhancement The number of Function Points developed in one hour Cost per each Function Point developed/enhanced The number of Function Points developed/enhanced for elapsed time period Maintenance The number of Function Points supported by one Full Time Equivalent (FTE) during a period Cost per each Function Point maintained 14 14

15 3X Web PC/workstation Mainframe Mixed Client server Productivity Varies by Development Type, Size and Platform Project Productivity FP/Hour 2X 1X ,000 1,200 1,400 1,600 1,800 Project function point size ILLUSTRATIVE Project Size can can account for for a 3 times productivity variation

16 Platform Productivity varies by by Platform type and should be be carefully classified and measured 16 Platforms typically include: Mainframe/Midrange Client Server Web Standalone Personal Computer/Workstation Mixed Optional platforms in special situations include: Data Warehouse Middleware Components System software Tools 16

17 Function Point Size Group Productivity varies by by size and requires size categories for for proper measurement Example Categories: New Development Size Groups Enhancement Size Groups Small FPs 1 50 FPs Medium 301 1,000 FPs FPs Large 1,001 4,000 FPs 501 2,000 FPs Very Large Greater than 4,000 FPs Greater than 2,000 FPs 17 17

18 Maintenance Productivity is Highly Dependent on Application Age and Platform Industry Average Company X Actual FPs per FTP >20 Age Group in Years Applications less less than 5 years old old and and greater than years old old are are the the most costly to to maintain 18 18

19 ADM Work Type: New Development and Enhancement Perspective Productivity Rate Example Effort The number of Function Points delivered per resources consumed 5 FPs per person month Cost Cost per each Function Point developed/enhanced $1000/FP Time-to-Delivery (schedule duration) The number of days to deliver the developed/enhanced xx FPs for the size category 100 Days for FP size category 19 19

20 ADM Work Type: Maintenance Perspective Productivity Rate Example Effort Cost The number of Function Points supported by one Full Time Equivalent (FTE) during a period of time Note: FTE needs to be defined in terms of productive hours per month Cost per each Function Point developed/enhanced 700 FPs/FTE $100/FP 20 20

21 Measuring Resources Consumed - Effort For AD&M activities, labor effort consumed is is a critical input that needs careful definition and accounting Roles included in time accounting for major categories of AD&M activities Specific activities included/excluded Definition of FTE Trends in time spent 21 21

22 Roles in ADM Activities Include All non-overhead effort expended directly by the core development or maintenance team such as: Project managers Analysts Programmers Testers Shared resources who work directly on the project/ application such as: Database analyst QA Configuration management personnel 22 22

23 Roles in ADM Activities (Continued) Exclude In general, roles that do not expend effort directly such as: Users Senior management Administration Operations personnel 23 23

24 Specific Activities Need to be Defined for New Development and Enhancement Include Planning and management Requirements definition Design Coding Testing Performance tuning (specific to the project) Installation and training (through first implementation) 24 24

25 Specific Activities Need to be Defined for New Development and Enhancement (Continued) Exclude Feasibility or business case studies Maintenance activities not associated with the project 25 25

26 Specific Activities Need to be Defined for Maintenance Include Corrective maintenance Perfective Preventative maintenance Technical adaptive maintenance Cosmetic and data maintenance 26 26

27 Specific Activities Need to be Defined for Maintenance (Continued) Exclude Effort that cannot be associated with a specific application such as operating system upgrades not specific to an application Work classified as New Development or Enhancement Operations and production support activities 27 27

28 Measuring Labor and Cost The The cost of of the the outsourcing agreement is is generally based on on the the annual or or monthly FTP labor rate rate and and needs to to be be carefully calculated and and measured The labor rate needs to be carefully negotiated, measured and benchmarked The outsourcer will charge a price to develop and maintain applications within scope. That price will include labor costs, overhead costs, and profit Understanding the terms and conditions related to other contract cost is critical to the understanding of labor rates Facility cost Hardware/software costs Desk top support Telecommunications 28 28

29 Time to Market (Schedule Duration) is another Critical Measure Schedule Duration by Project Size Category and Platform Expected Schedule Days < Project Size in Function Points Actual project schedules (days) should be be compared against baselines, targets or or benchmarks by by size category and platform 29 29

30 Special Situations The following situations require special consideration: Application decommissioning (retirement) Package implementation and installation of upgrades Cancelled projects Ad hoc reports Reusable software components Infrastructure support Changes to FP Counting Rules (CPM Version) 30 30

31 Quality Metrics Quality typically takes on on two perspectives Defects Customer satisfaction 31 31

32 Quality Defect Metrics New Development and Enhancement Projects The number of defects per project Function Point discovered in the first 90 days after implementation 30 days, 60 days or 365 days are used but are less common All severity levels if possible Applications The number of defects per application Function Point discovered per year Per quarter or per month are used but are less common All severity levels if possible 32 32

33 Defect Needs to be Well Defined A defect is defined as a problem or an error that, uncorrected, will produce unsatisfactory results Unsatisfactory results range from cosmetics to inoperable systems (typically all severity levels) Level Severity 1 Severity 2 Severity 3 Severity 4 Definition Disastrous system cannot be used without corrective action being taken Major system can be used with major functional restrictions Minor system can be used with minor functional restrictions Cosmetic system can be used with full functionality 33 33

34 Quality Defect Metrics The following items are are collected for for quality measurement Work Type Category: New Development, Enhancement or maintenance Defects: Number and severity (optional) Size: Function Points Attributes: Application age, platform 34 34

35 Constructing Defect Rates Defect Ratios Example The number of defects per Project Function Point (first 90 days in production).05 defects/function Point The number of defects per Application Function Points (annual) 50 defects/1,000 FPs 35 35

36 Customer Satisfaction Metrics AD&M contracts often include one one or or more Customer Satisfaction service level agreements (SLAs). The contract requires the vendor to maintain a satisfaction level above a defined threshold Periodically the customer organization is asked to evaluate their level of satisfaction with one or more of the outsourced services There are challenges in measuring customer satisfaction The Customer Satisfaction score is an opinion about opinions Vendors do not always have control Benchmarking is difficult 36 Regardless of the challenges, Customer Satisfaction adds a missing perspective not captured by other quality and productivity measures 36

37 Outsourcing Agreements Often Include Requirements for Process Maturity 37 Process Change Management Technology Change Management Defect Prevention Software Quality Management Quantitative Process Management Peer Reviews Inter-group Coordination Software Product Engineering Integrated Software Management Training Program Organization Process Definition Organization Process Focus Subcontract Management Requirements Management Quality Assurance Level 2 Configuration Management Project Tracking & Monitoring Project Planning Level 3 CMMI or or other Proprietary Assessment are are Conducted Level 4 Level 5 Legend Not satisfied Partially satisfied Fully satisfied Not applicable 37 41

38 Agenda Overview Metrics Classification and Definition Establishing and Measuring Improvements Summary 38 38

39 Summary Measures for Contract Negotiation and Performance Management Software Development and Support Activities Quality Thresholds $/FP Quality Rates Development Enhancement Maintenance Defects/FP User Satisfaction Labor Rates by Activity/Location Performance Improvements and Incentives $/Hour A B C D E Processes Current Performance Rates Industry Averages and Best in Class % Improvement 39 Activities/Locations 39

40 Improvements are Typically Based on Percent Increases or Decreases Pay by the Metric Pay $n for each newly developed FP delivered Pay $n for each enhanced FP delivered Pay $n for each application FP maintained Deliver & Maintain Fixed Output for a Fixed Annual Price Deliver n FP s of newly developed software Deliver n FP s of enhancements to existing software Maintain the portfolio of n FP s Adjustments & credits are used for growth in the portfolio or trade-off between work types Metrics for Performance Management (Incentives, Penalties, Renegotiation) n FP s per hour for new development n FP s per hour for enhancements n Cost per FP for new development n Cost per FP for enhancements Maintain n FP s per FTE n Cost per FP maintained n Defects per FP Customer satisfaction rating 40 40

41 Baselines and Benchmarks are Useful Tools for Establishing Improvement Targets Future targets should be based on current performance Improvement targets should be realistically set and not be based on marketing promises The degree of improvement should consider The current baseline versus industry benchmarks The goals for outsourcing The outsourcer capabilities The level of process maturity The degree of organizational change including offshoring Industry trends Improvement percents generally range from 3% to 15% Some situations dictate improvement ranges from -10% to +30% 41 41

42 Agenda Overview Metrics Classification and Definition Establishing and Measuring Improvements Summary 42 42

43 Summary of Outsourcing Metrics The The following summarizes common measures used in in Outsourcing 43 Work Type New Development or Enhancement Maintenance Resources Consumed Cost Effort Elapsed time Quality Defects Customer survey Output Function points 43

44 Detailed Definitions and Guidelines are Needed Carefully define and and document the the metrics used used and and the the standards for for accounting 44 Define each metric in detail Description Calculation How collected How used and reported Establish details for resource accounting Roles and activities to be included/excluded Cost items to be included/excluded Definition for resources and calculations (FTE, productive month, etc.) Base measurement analysis on the factors that impact productivity and quality (platform, size, age, etc.) Establish appropriate service level and improvement targets Based on baseline and benchmark data Establish reasonable targets 44

45 Cost/FP or FP/Effort Matrices Matrices are are often established by by project size and platform Platform Project Size (FP) Web Mainframe Client Server , > 1, Matrices can be used to set price or performance target 45 45

46 Evaluating COTS with Function Fit Analysis Requirements Function Point Analysis COTS Functional Evaluation Functional GAP Analysis Project Estimates Make/Buy Analysis 46 46

47 Benefits of COTS Function Fit Analysis Documents functional requirements in terms understandable to users and technicians Identifies the functional gap of the COTS products Quantifies development effort of COTS usage Provides information to the COTS vs. Development decision making process Example: Navy 2 COTS, both low fit 95% new development, 3% enhancement, 2% use as is out of box 47 Chose to customize 47

48 Future Trends Price Models Based on historical data and agreed criteria Price is established by entering information into the model Independent Benchmarking Requires a credible source of benchmark information and predefined process mutually agreed upon Similar delivered projects are identified, industry average or best in class price is established Service provider and customer accepts Price Model or Benchmark price terms 48 48

49 Cost per Function Point Contracting Can be based on Baseline, Benchmark or combination Often based on productivity rate and negotiated labor rate Cost per FP can either set the price (fixed price or forward pricing) or as performance target When used as performance target, penalties and incentives are established Incentives can be split the benefits Penalties can be refunds or cost reductions At Risk amount can be 10% of total revenues 49 49

50 Example Transformation Project via COTS 1. Understand requirements Old system New functions 2. Perform function fit analysis 3. Function point count COTS enhancement 4. Establish price per function point for enhancement(s) based on baseline or benchmark Use for contract price Use to evaluate bids 50 50

51 Example Maintain and Enhance Existing Application(s) 1. Understand size and age 2. Baseline current Maintenance baseline Enhancement baseline 3. Establish current cost per function point Maintenance Enhancement projects 4. Establish price per function point for maintenance and enhancements 5. Establish performance targets and/or cost reductions 51 51

52 Other Considerations for Contracting Time and material activities versus FP priced work Insource/Outsource options and flexibility Termination clauses Impact of offshoring Other non-development costs 52 52

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